Leverage Shocks: Firm-Level Evidence on Debt Overhang and Investment

December 18, 2020

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Format: Chicago

Serhan Cevik, and Fedor Miryugin. Leverage Shocks: Firm-Level Evidence on Debt Overhang and Investment, (USA: International Monetary Fund, 2020) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

The global economy is in the midst of an unprecedented slump caused by the coronavirus pandemic. This systemic risk like no other at a time of record-breaking debt levels, especially among nonfinancial firms across the world, could exacerbate corporate vulnerabilities, deepen macro-financial instability, and cause long-lasting damage to economic potential. Using data on more than 2.8 million nonfinancial firms from 52 countries during the period 1997–2018, we develop a two-pronged approach to investigate the relationship between corporate leverage and fixed investment spending. The empirical analysis, robust to a battery of sensitivity checks, confirm corporate leverage is highly vulnerable to disruptions in profitability and cash flow at the firm level and economic growth at the aggregate level. These findings imply that corporate debt overhang could become a strenuous burden on nonfinancial firms, especially if the COVID-19 pandemic lingers and global downturn becomes protracted.

Subject: Corporate investment, Currencies, Debt burden, Emerging and frontier financial markets, Financial sector development

Keywords: Corporate debt, Debt overhang, Empirical inquiry, Firm level, Firm size, Firm-level, Firms' behavior, Fixed investment, Indebted firm, Investment appetite, Leverage, Nonfinancial firm, Sector peer, WP

Publication Details

Pages:

22
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/287
Stock No:

WPIEA2020287
ISBN:

9781513564654
ISSN:

1018-5941

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